WEBVTT - Is Direct Indexing Coming for the ETF? 0:00:05.880 --> 0:00:07.840 We'll gan to trillions. I'm Joel Webber and I'm Americ 0:00:07.840 --> 0:00:13.400 Bell tunis Eric. Today we're gonna talk about something called 0:00:13.480 --> 0:00:17.560 direct indexing. What is that? Direct indexing is sort of 0:00:17.600 --> 0:00:20.680 a it's a newer, fresher name for what was previously 0:00:20.680 --> 0:00:24.200 called a separately managed account, and institutions use this a 0:00:24.200 --> 0:00:26.520 lot where and when I wrote my book on the 0:00:26.560 --> 0:00:29.240 e t F world and how institutions use them, shameless plug, 0:00:29.440 --> 0:00:33.159 shameless plug, it's called The Institutional EF. It is available 0:00:33.159 --> 0:00:35.920 on Amazon. But let's move on. UM, I was like, 0:00:35.960 --> 0:00:39.040 why don't big pensions just by the e t F. Well, 0:00:39.159 --> 0:00:41.960 they can go and get the SMP done for even 0:00:42.040 --> 0:00:44.479 cheaper than the e t F. So separately managed to 0:00:44.440 --> 0:00:46.680 accounts come up in my research just terms you just 0:00:46.720 --> 0:00:49.400 buy all the stocks directly and you let a black 0:00:49.479 --> 0:00:51.879 rock just do it. They it's it's almost like your 0:00:51.920 --> 0:00:54.120 own private e t F and you don't have to 0:00:54.120 --> 0:00:56.160 go to the public pool down the street, and institutions 0:00:56.200 --> 0:00:59.320 like that. It's cheaper, and ultimately the problem with that 0:00:59.400 --> 0:01:01.560 is in order to get at that pricing, you would 0:01:01.640 --> 0:01:04.640 need a hundred million dollars, So it was really an 0:01:04.640 --> 0:01:06.880 institutional thing. The more money you have, the lower you 0:01:06.920 --> 0:01:10.280 get charged. That's just generally how investing works. And direct 0:01:10.360 --> 0:01:12.959 indexing has now come along with technology and sort of 0:01:12.959 --> 0:01:15.559 said hey, let's democratize this and bring it to advisors. 0:01:16.040 --> 0:01:18.520 And there's a couple advantages they think are going to 0:01:18.600 --> 0:01:23.440 appeal to advisors. There's some competition with mutual funds and ets, 0:01:23.520 --> 0:01:25.720 which I think, with a heart of our discussion, some 0:01:25.760 --> 0:01:28.200 have I actually have heard the term E t F 0:01:28.280 --> 0:01:30.920 killer for direct indexing because obviously if you use this, 0:01:30.920 --> 0:01:32.320 you wouldn't use an E t F or you might 0:01:32.400 --> 0:01:34.600 use them together. Um, so I thought, you know, we 0:01:34.640 --> 0:01:37.280 should explore this. We recently wrote a note about it 0:01:37.520 --> 0:01:39.760 where he went through some of the advantages like a 0:01:39.840 --> 0:01:41.960 tail the tape between E t F and direct indexing. 0:01:42.040 --> 0:01:44.360 But E t F s aren't all who this competes with. 0:01:44.440 --> 0:01:47.680 But there's tax benefits and customization benefits which will go over. 0:01:48.000 --> 0:01:51.720 But direct indexing is kind of if E t F 0:01:51.800 --> 0:01:53.000 are the new kid on the block, this is sort 0:01:53.040 --> 0:01:54.720 of the new new kid on the block in terms 0:01:54.720 --> 0:01:57.320 of investment products. So to help us understand them, we're 0:01:57.360 --> 0:02:00.800 joined by Morgan Barna of Bloomberg Intelligence and also Brian 0:02:00.920 --> 0:02:05.760 Langstrat who's the CEO of Parametric? What's Parametric the largest 0:02:05.800 --> 0:02:10.520 direct indexing platform company at three billion dollars. So if 0:02:10.560 --> 0:02:12.639 Parametric or an et F, fish or I think you'd 0:02:12.720 --> 0:02:15.400 rank fourth just to sort of say this is how 0:02:15.400 --> 0:02:18.959 big this is getting. So three billion is a ton 0:02:19.000 --> 0:02:22.560 of money. Um. That that said, I think, A that's 0:02:22.560 --> 0:02:26.320 way bigger than most others. And B direct indexing and 0:02:26.400 --> 0:02:30.239 SMAs are obviously very linked and like s m as 0:02:30.280 --> 0:02:32.480 are big, like black Rock has over a trillion in 0:02:32.720 --> 0:02:35.400 s m as. So it's a it's a it's kind 0:02:35.440 --> 0:02:38.160 of a gray area on where direct indexing begins and 0:02:38.320 --> 0:02:40.720 s m A ends. But let's just say that Parametric 0:02:40.800 --> 0:02:45.200 is the biggest of this new wave this time on 0:02:45.320 --> 0:02:52.320 trillions exploring direct indexing. Brian Morgan welcoming trillions. Thanks joining So, Brian, 0:02:52.360 --> 0:02:55.000 I want to start with you. Where did this space 0:02:55.080 --> 0:03:00.840 come from? Yeah, So, Parametric started what is called erect indexing, 0:03:00.919 --> 0:03:03.120 or building a separately managed to count to target an 0:03:03.120 --> 0:03:06.800 index and then customize it. So it's been around for 0:03:06.919 --> 0:03:09.040 our shop for twenty seven years. We think we were 0:03:09.040 --> 0:03:12.079 one of the first, if not the first, But when 0:03:12.120 --> 0:03:14.320 we started it, there wasn't a lot of conversation about 0:03:14.360 --> 0:03:18.000 it and how did it come to be. Yeah, Um, 0:03:18.040 --> 0:03:21.880 we had a family office client who had struggled with 0:03:21.960 --> 0:03:24.680 that kind of age old dilemma of hiring and firing 0:03:24.720 --> 0:03:28.680 active managers, comparing them to a passive universe, one growth, 0:03:28.680 --> 0:03:32.399 one value, and together with their consultant, came with the idea, 0:03:32.400 --> 0:03:35.240 instead of hiring and firing and evaluating these active managers 0:03:35.280 --> 0:03:38.640 equity managers, let's buy the universe we compare themselves to. 0:03:39.120 --> 0:03:42.320 And the really innovation they had gonna have some money 0:03:42.320 --> 0:03:44.840 to be able to say I'm not buy the universe. Yeah, well, 0:03:44.880 --> 0:03:48.160 I think you can build and manage a separately managed 0:03:48.160 --> 0:03:51.280 to count the tracks and index for I mean, it's 0:03:51.320 --> 0:03:54.240 not a mass affluent product. It's not a product for 0:03:54.280 --> 0:03:57.440 the masses. But you know, with a with a portfolio 0:03:57.480 --> 0:03:58.920 size of a quarter of a million dollars, half a 0:03:58.920 --> 0:04:02.400 million dollars, a million dollars with really consistent tracking here, 0:04:02.440 --> 0:04:05.040 so you have the same pre tax experiences that universe 0:04:05.280 --> 0:04:09.640 and index a custom index, the SMP five, the Rustle three. Um. 0:04:09.920 --> 0:04:12.120 The idea that they had was instead of just tracking 0:04:12.120 --> 0:04:15.640 the universe, and it was their idea, not ours. Uh, 0:04:15.800 --> 0:04:18.520 let's do it. But Let's be cognizant of the tax impact. 0:04:18.920 --> 0:04:22.640 Let's not just rebalance. Let's not trade the securities when 0:04:22.920 --> 0:04:24.359 if it comes out of the index er and it 0:04:24.440 --> 0:04:26.920 let's not Let's think about where the gains are, where 0:04:26.920 --> 0:04:29.680 the losses are in the portfolio. That kind of customization 0:04:29.720 --> 0:04:31.799 requires you to do it on a separate account basis, 0:04:31.960 --> 0:04:36.200 portfolio by portfolio. Let's um and then let's let's let's 0:04:36.200 --> 0:04:40.159 have two objectives, track that universe and really minimize the 0:04:40.200 --> 0:04:43.040 tax impact of the portfolio. They brought the idea to us. 0:04:43.040 --> 0:04:44.800 We said that was interesting. We were a small firm, 0:04:44.839 --> 0:04:48.920 didn't have a lot to do UM and we soon 0:04:48.960 --> 0:04:50.640 found that a lot of the people were interested in 0:04:50.680 --> 0:04:54.600 the idea. Could you capture the benefit of indexing, the 0:04:54.680 --> 0:05:00.160 broad diversification, the consistent performance, the low costs, but you 0:05:00.200 --> 0:05:03.440 add additional value through customization. And there really are three 0:05:03.520 --> 0:05:06.160 types of customization that drive this. Now. Tax is still 0:05:06.200 --> 0:05:09.640 the biggest E. S G and R I, re sponsible investing, 0:05:10.240 --> 0:05:13.280 and then creating your own bespoke exposure, something that's not 0:05:13.360 --> 0:05:18.320 available in a typical pooled, commingled vehicle. And you know, 0:05:18.520 --> 0:05:20.560 for the last twenty seven years, it's a little bit 0:05:20.600 --> 0:05:22.280 amusing to me to think about this as the new 0:05:22.320 --> 0:05:24.080 kid on the block. I was, I was the portfolio 0:05:24.080 --> 0:05:26.960 manager twenty seven years ago on the account. Uh. And 0:05:27.080 --> 0:05:30.520 hundreds of billions of dollars later. Uh. It's become quite 0:05:30.760 --> 0:05:34.120 an interesting alternative for some. I wouldn't call an E 0:05:34.200 --> 0:05:36.720 t F killer for some versus E t F and 0:05:36.760 --> 0:05:40.320 index mutual funds. It's interesting though. Labeling matters, Like I 0:05:40.600 --> 0:05:43.279 compared direct indexing is to E t F some mutual 0:05:43.279 --> 0:05:47.160 funds as smart beta is too quantitative. Quantitative has been 0:05:47.160 --> 0:05:50.359 around for a long time, right, you know, decades, but 0:05:50.400 --> 0:05:52.479 they that smart beta label made it seem new and 0:05:52.480 --> 0:05:55.200 fresh and democratized. This so I think that is why 0:05:55.279 --> 0:05:57.360 it tends to be looked at as the new thing. Yeah, 0:05:57.600 --> 0:06:00.160 and tax regimes come and go, you know, to act 0:06:00.240 --> 0:06:04.520 rates increase, they decrease people's sensitivity to taxes. Technology has 0:06:04.520 --> 0:06:10.120 made it more more easily done, more easily understandable. But 0:06:10.160 --> 0:06:12.680 we've been hammering away at this for for for two 0:06:12.680 --> 0:06:15.400 and a half decades. What's changed in that time in 0:06:15.480 --> 0:06:18.680 terms of what what the vehicle actually looks like? Yeah, 0:06:18.720 --> 0:06:21.160 not a lot um. It's really like to say, a 0:06:21.200 --> 0:06:23.800 parametric we only have one or two or three good 0:06:23.839 --> 0:06:27.760 ideas in thirty years, and this idea is pretty good. Yeah. Well, 0:06:28.040 --> 0:06:30.200 there's people I think that they have good ideas every 0:06:30.279 --> 0:06:33.520 day about what to invest, and we don't um the idea. 0:06:33.600 --> 0:06:36.280 It's a very very simple idea, and that is capture 0:06:36.680 --> 0:06:39.120 what we all know inherently to be the value and 0:06:39.200 --> 0:06:42.359 power and the compelling logic of index based investing. But 0:06:42.440 --> 0:06:44.320 do it in a separate account. And once you cross 0:06:44.400 --> 0:06:47.200 that line from commingled to separate account, the world opens 0:06:47.279 --> 0:06:50.279 up to you in terms of customization. You can fund 0:06:50.320 --> 0:06:52.240 with the pre existing securities. You don't have to fund 0:06:52.240 --> 0:06:54.119 with cash, so you don't have to realize the gains 0:06:54.160 --> 0:06:56.359 on the way in if they're there. That's huge for 0:06:56.440 --> 0:06:59.600 many people. You can do loss harvesting. Loss harvesting is 0:06:59.600 --> 0:07:03.839 probably the most commonly mentioned benefit, but it's it is 0:07:03.839 --> 0:07:05.680 not the end all. It is a lot other You 0:07:05.680 --> 0:07:07.719 can do a lot of other tax management, gifting of 0:07:07.800 --> 0:07:12.200 securities up and then you can build the exposure that 0:07:12.280 --> 0:07:14.360 might be a little bit different than the index. You 0:07:14.360 --> 0:07:16.800 can put a responsible screen on it. You can you 0:07:16.840 --> 0:07:19.240 can say I like to tilt toward value. So the 0:07:19.280 --> 0:07:22.360 technology to build and understand how you manage those exposures. 0:07:22.480 --> 0:07:25.840 Continues to evolve. Uh, we continue to innovate around the 0:07:25.920 --> 0:07:28.200 edges about that central core ideas the same as it 0:07:28.280 --> 0:07:31.640 was in two You just had a strategic kind of 0:07:31.680 --> 0:07:34.360 alignment with Eden Vans. What does this do for the 0:07:34.360 --> 0:07:36.320 parametric I mean you've you've been part of Eating Vans 0:07:36.320 --> 0:07:38.679 for a long time now, but um, this new alignment 0:07:38.680 --> 0:07:41.600 with the fixed income business and the technology, what what 0:07:41.640 --> 0:07:44.080 are you looking forward to? Yeah? And and that just 0:07:44.120 --> 0:07:46.880 I want to piggyback off that, which is that this 0:07:46.960 --> 0:07:49.640 is I've always heard direct indexing is an equity thing, 0:07:49.760 --> 0:07:51.760 right is it mostly for the equities? But can you 0:07:51.760 --> 0:07:53.600 do fixed income also? I guess can you talk about 0:07:53.640 --> 0:07:57.440 what part of your portfolio can you direct indexing? Right now? Yeah? 0:07:57.480 --> 0:08:01.280 So if we think about direct indexing buying and holding 0:08:01.280 --> 0:08:05.880 a broadly diversified exposure, a fixed income exposure and equity exposure, 0:08:05.920 --> 0:08:09.600 or maybe both in the same account. Uh, they're the 0:08:09.640 --> 0:08:14.320 most popular fixed income type solution in that vein or 0:08:14.400 --> 0:08:18.800 laddered portfolios, ladder municipal bond portfolios, ladder corporate bond portfolios. 0:08:18.800 --> 0:08:20.880 It's a business that has been built up within Eating 0:08:20.960 --> 0:08:23.120 Vance since two thousand and eight I think may have 0:08:23.160 --> 0:08:28.040 started a few years later, but recently we combined those 0:08:28.240 --> 0:08:31.280 products and that investment technique and those investment skills in 0:08:31.320 --> 0:08:34.240 the technology with Parametry who kind of redrew the boundaries 0:08:34.320 --> 0:08:36.560 within Eating Vance. And now we're coming to market with 0:08:36.640 --> 0:08:38.760 both and we always did before, but we're doing in 0:08:38.760 --> 0:08:42.359 a coordinated way. We're investing in the systems in the technology, 0:08:42.960 --> 0:08:45.640 we're investing in the digital tools around it, we're investing 0:08:45.679 --> 0:08:48.439 in the performance reporting. And that's really what it means 0:08:48.480 --> 0:08:51.520 to us to kind of reshape the eaton Vance business 0:08:51.520 --> 0:08:54.400 aiming at this very exciting growth market. There's not a 0:08:54.440 --> 0:08:57.000 lot of growth opportunities in the investment management business. As 0:08:57.040 --> 0:09:00.240 you guys know, Uh, the investment management businesses shift thing 0:09:00.360 --> 0:09:05.520 toward rules based, systematic, low cost, clear value added products, 0:09:05.559 --> 0:09:09.679 away from the traditional value proposition of alpha or active management. 0:09:09.720 --> 0:09:12.560 And we've got a great franchise across that. So let's 0:09:12.600 --> 0:09:14.600 bring this up. Let's what we'll tackle this in a 0:09:14.640 --> 0:09:17.400 couple of blocks. Firsts, customization. That's a big benefit here, 0:09:18.120 --> 0:09:22.560 it's the only benefit. Well, the tax thing that's customization. Okay, well, okay, 0:09:22.600 --> 0:09:26.240 Well we'll break customization into two parts. Picking the stocks 0:09:26.280 --> 0:09:30.160 and the tax. When I hear this proposed, it sounds 0:09:30.160 --> 0:09:32.920 so good. Hey, you don't like this company? Does this? 0:09:33.040 --> 0:09:34.560 Pull it out? It's like an E s G kind 0:09:34.559 --> 0:09:37.320 of customization. Or if you work at Apple and you 0:09:37.440 --> 0:09:39.320 have a lot of their stock, you can pluck that out. 0:09:39.880 --> 0:09:42.480 Here's the thing, though, we all know that that makes 0:09:42.520 --> 0:09:47.079 the client the active manager. Now and we all know, 0:09:47.160 --> 0:09:50.040 like you take the I Shares Social Index, it's underperforming 0:09:50.040 --> 0:09:54.880 the SMP by over ten years. Are people gonna be 0:09:54.920 --> 0:09:58.480 able to stomach that if they don't uh, completely tie 0:09:58.640 --> 0:10:01.800 or beat the SMP, because that is a for whatever reason, 0:10:01.800 --> 0:10:03.480 the SNP is like God or you know, in the 0:10:03.600 --> 0:10:06.559 in this in portfolios, and if you customize, your odds 0:10:06.600 --> 0:10:09.480 of beating it are pretty low. You become an active manager. 0:10:09.520 --> 0:10:11.920 And we know it's hard. So how how does that work? Yeah, 0:10:11.920 --> 0:10:15.719 so you've you've hit the central trade off of direct indexing, 0:10:15.840 --> 0:10:18.840 and that is you accept a certain amount of deviation 0:10:18.960 --> 0:10:22.160 what we call a quant manager tracking air versus the index, 0:10:22.320 --> 0:10:24.920 in order to avail yourself of the customization. You do 0:10:24.960 --> 0:10:26.920 it every time you harvest a loss. You do it 0:10:26.960 --> 0:10:28.400 every time you put it in in the s G and 0:10:28.520 --> 0:10:32.040 r I. Every time you tilt, and so the investor 0:10:32.080 --> 0:10:34.640 has to believe we can show that over time those 0:10:34.679 --> 0:10:38.559 small differences from those customization decisions, those variances versus a 0:10:38.640 --> 0:10:42.120 pure tracking index are worth it to them. They average 0:10:42.160 --> 0:10:44.600 out to be very low on a pretax basis, and 0:10:44.640 --> 0:10:46.800 the after tax or the E S g R I 0:10:46.840 --> 0:10:49.520 benefit comes through very dramatically, and we can show that 0:10:49.600 --> 0:10:52.240 now over twenty five years. So when you deviate from 0:10:52.280 --> 0:10:55.400 an index, there's a lot of different ways to do it. 0:10:55.400 --> 0:10:59.200 If I'm tilting toward a factor or a sector or 0:10:59.280 --> 0:11:02.120 an industry read well, then I'm probably going to see 0:11:02.120 --> 0:11:05.800 myself with long periods of outperformance or under performance. But 0:11:05.840 --> 0:11:09.720 if my entire deviation from the index can be understood 0:11:09.760 --> 0:11:12.800 as very small mis waitings on an individual stock based 0:11:12.840 --> 0:11:16.079 what a risk model would call idiosyncratic risk, they average 0:11:16.120 --> 0:11:17.920 out over time to look like the index. So if 0:11:17.920 --> 0:11:20.440 you look at a Parametric composite over twenty years, the 0:11:20.440 --> 0:11:24.640 pre tax performance almost indistinguishable from the pre tax performance 0:11:24.679 --> 0:11:27.640 of the index. It's the after tax, but we're trading. 0:11:27.679 --> 0:11:32.080 That's our currency tracking error or mistracking versus customization benefit, 0:11:32.360 --> 0:11:35.800 and our engineers at Parametric are working on that from 0:11:35.800 --> 0:11:38.080 a thousand different angles. But you're right, you have to 0:11:38.120 --> 0:11:41.200 be willing to accept a difference in order to avail 0:11:41.240 --> 0:11:44.640 yourself of the customization. Now, obviously, with with an e 0:11:44.679 --> 0:11:46.800 t F, let's just say the sp F und you 0:11:46.840 --> 0:11:49.959 can now get that for four three basis points, probably 0:11:50.000 --> 0:11:51.720 two and one in the next couple of years. If 0:11:51.760 --> 0:11:53.640 I can get a whole portfolio for under ten bits 0:11:53.679 --> 0:11:56.640 at this point ten basis points. Um, how much does 0:11:56.720 --> 0:12:00.240 this cost? And how hard is it to dislodge such 0:12:00.280 --> 0:12:03.440 a compelling value proposition, which is this sort of like 0:12:03.760 --> 0:12:07.240 et F portfolio, especially from the advisor's mindset, because um, 0:12:07.280 --> 0:12:09.880 that's good for them, lower their fund fees more their 0:12:09.880 --> 0:12:12.880 fees is intact. Yeah, no, we love to think about 0:12:13.480 --> 0:12:16.320 the trade off there. So let's just make it a 0:12:16.520 --> 0:12:18.520 Let's say it cost you thirty basis points for a 0:12:18.559 --> 0:12:21.000 direct index portfolio and you can get the e t 0:12:21.120 --> 0:12:22.959 F for free. All right, let's just start with it. 0:12:23.040 --> 0:12:25.120 Thirty basis points is are bogey. We gotta add thirty 0:12:25.120 --> 0:12:27.760 basis points and value over time, otherwise you need to 0:12:27.800 --> 0:12:29.679 go do something else. And the majority of the d 0:12:29.760 --> 0:12:32.480 F investors should stick with ETFs. But if you find 0:12:32.520 --> 0:12:35.120 yourself in a position where you have pay high taxes, 0:12:35.280 --> 0:12:37.480 you're fund with pre existing securities, you've got a long 0:12:37.520 --> 0:12:41.120 time horizon, you're terriably inclined. We can add a hundred 0:12:41.120 --> 0:12:44.040 and fifty two hundred basis points a year and after 0:12:44.120 --> 0:12:47.480 tax performance value above the return of an index. Uh 0:12:47.520 --> 0:12:49.439 So that's that's in my mind, one of the best 0:12:49.440 --> 0:12:52.440 tradeoffs and money management. How you take fifty basis points 0:12:52.440 --> 0:12:54.600 of tracking, are you get a hundred fifty basis points 0:12:54.640 --> 0:12:57.800 of excess return? You pay thirty basis points for it. 0:12:58.040 --> 0:13:01.160 Any quantitative manager out there, we think that puts us 0:13:01.160 --> 0:13:04.200 in the top courttile top death style. That's the trade off. 0:13:04.360 --> 0:13:07.840 But it but it isn't just the after tax performance business. 0:13:08.000 --> 0:13:10.440 If we've been able to build a round a pre 0:13:10.440 --> 0:13:14.360 existing holding or a series of holdings and defer the 0:13:14.440 --> 0:13:16.840 gain and not for a long term. If they have 0:13:16.960 --> 0:13:19.000 charitably inclined, so every year they want to give five 0:13:19.000 --> 0:13:21.440 percent of that portfolio two percent to charity, and we 0:13:21.480 --> 0:13:24.040 can go into the separate account and we can select 0:13:24.120 --> 0:13:27.120 the most advantageous tax lots, the tax lots that have 0:13:27.200 --> 0:13:30.880 the largest embedded unrealized gain and give those. Then the 0:13:30.960 --> 0:13:34.320 value starts to add up. So the trade off of 0:13:34.360 --> 0:13:36.520 our fees and the fees inherent in the portfolio, and 0:13:36.559 --> 0:13:39.400 the cost versus the benefit, we think is very compelling, 0:13:39.600 --> 0:13:45.199 not to everyone investors of size investors, uh you know, uh, 0:13:45.200 --> 0:13:49.559 with tax sensitive investors who have long time horizons, on 0:13:49.600 --> 0:13:51.800 and on and on. I think the majority of the 0:13:51.880 --> 0:13:55.240 money in ETFs gually the taxable money should be in 0:13:55.240 --> 0:13:57.640 a direct ecnticcy, but maybe not. The majority of the 0:13:57.679 --> 0:14:00.559 investors in ETF should be in direct indexing. So when 0:14:00.600 --> 0:14:03.880 when clients and investors come to you, how much of 0:14:03.920 --> 0:14:06.760 what you're offering is literally out of the box solution 0:14:06.880 --> 0:14:10.440 off the shelf solution versus something that's totally customized for them, 0:14:10.880 --> 0:14:12.960 And like are you looking at like, hey, I've got 0:14:12.960 --> 0:14:15.280 some mutual funds that have just been kicking around forever. 0:14:15.320 --> 0:14:17.600 Can you absorb those and do something with them? Yeah? 0:14:17.640 --> 0:14:20.520 So there, there, you've just hit on the difficulty in 0:14:20.600 --> 0:14:24.520 running the business. So commingled vehicles ETF. Some mutual funds 0:14:24.560 --> 0:14:27.600 are great for money managers that you can just the 0:14:27.680 --> 0:14:31.760 leverage the economies of scale, the marginal costs wonderful custom 0:14:31.880 --> 0:14:34.760 Separate accounts are a lot of work. We have to 0:14:34.800 --> 0:14:37.320 customize on the way in. We have to customize during 0:14:37.320 --> 0:14:40.000 the management. Then we have to defend that customization and 0:14:40.040 --> 0:14:44.640 client service and performance reporting. So uh it is we 0:14:44.680 --> 0:14:47.160 do all of the things you talked about. The simplest 0:14:47.160 --> 0:14:49.680 example is you come to me with cash and you 0:14:49.760 --> 0:14:52.400 want to plain vanilla index or a standard index like 0:14:52.440 --> 0:14:56.560 the Rustle one, and you want simple loss harvesting. That's 0:14:56.560 --> 0:14:59.200 a pretty plain vanilla portfolio. We probably don't have to 0:14:59.240 --> 0:15:01.200 work hard to set that up. And if you understand 0:15:01.280 --> 0:15:03.600 how much cash am I bringing, you know we are 0:15:03.600 --> 0:15:07.040 Our minimums are two fifty dollars and many UH programs 0:15:07.040 --> 0:15:10.400 and platforms, so uh you know, we run about forty 0:15:10.520 --> 0:15:14.040 thousand individually separately managed accounts. They range from a billion 0:15:14.040 --> 0:15:15.840 dollar account for some of the wealthiest investors in the 0:15:15.880 --> 0:15:18.720 country down to to to UH portfolio that would be 0:15:18.720 --> 0:15:22.280 in the king And what percent are you dealing with 0:15:22.320 --> 0:15:28.040 the advisor versus a direct investor. Almost every UH portfolio 0:15:28.080 --> 0:15:31.120 that we manage comes with an advisor. And I think 0:15:31.240 --> 0:15:34.080 you hit on the point. One thing that direct indexing 0:15:34.120 --> 0:15:37.520 does above and beyond this after tax performance value and 0:15:37.520 --> 0:15:40.320 customization value relative to its fees is it becomes a 0:15:40.360 --> 0:15:43.440 tool for the advisor to do value added wealth management. 0:15:43.760 --> 0:15:46.440 So it's good for the client, but it's great for 0:15:46.520 --> 0:15:50.040 the advisors conversation. They can create a portfolio that has 0:15:50.080 --> 0:15:52.800 real value that you can't just walk across the street 0:15:52.840 --> 0:15:54.240 and get another one that looks like it. You can't. 0:15:54.240 --> 0:15:56.440 You don't see an advertisement for it on the Super 0:15:56.480 --> 0:15:59.520 Bowl uh television where you think here's a branded et F. 0:15:59.800 --> 0:16:02.840 This is a bespoke portfolio created in concert with the 0:16:02.880 --> 0:16:06.080 advisor that solves a problem for the investor. Yeah, we'll 0:16:06.080 --> 0:16:08.600 say we um we I just went to Wealth Stack, 0:16:09.000 --> 0:16:13.000 which is that conference fintech ish. This is a big deal. 0:16:13.040 --> 0:16:14.720 And Morgan and I talked about this a lot. When 0:16:14.760 --> 0:16:16.840 we look at the tail of the tape is the 0:16:16.880 --> 0:16:19.560 technology and the value add Advisors are on the hunt 0:16:19.600 --> 0:16:22.600 for value add let's face it, because they better min Vanguard. 0:16:22.680 --> 0:16:26.800 Everybody's doing cheap advice. Now, Morgan, um, why don't you 0:16:26.880 --> 0:16:29.240 riff on this because I think you have the most 0:16:30.000 --> 0:16:33.040 knowledge about this sort of technological revolution going on in 0:16:33.040 --> 0:16:35.080 the advisor world. Yeah, I'm so interested in the way 0:16:35.080 --> 0:16:37.880 that it seems like parametric and eating vans are now 0:16:37.960 --> 0:16:41.400 so focused on the ability to scale accounts at a 0:16:41.400 --> 0:16:44.680 lower um, a lower access point, but in part create 0:16:44.960 --> 0:16:48.800 create efficiencies you can continue to really invest. There's this 0:16:48.920 --> 0:16:53.360 seems like such a period for investing in technology enables advisors. 0:16:53.440 --> 0:16:57.040 What how does that plan to the distribution um. The 0:16:57.040 --> 0:17:00.120 dilemma that I think in understanding this marketplace is how 0:17:00.240 --> 0:17:02.720 much of the marketplace for this type of investing is 0:17:02.720 --> 0:17:04.439 to do it yourself? Because there are tools that the 0:17:04.440 --> 0:17:07.160 investor can just log on and build these portfolios or 0:17:07.280 --> 0:17:09.960 a robo when they can hire someone, or are these 0:17:09.960 --> 0:17:12.880 tools that an advisor can use themselves in their practice 0:17:12.920 --> 0:17:15.440 to do it themselves. My belief after watching this for 0:17:15.440 --> 0:17:18.119 about twenty five years is that the market for the 0:17:18.160 --> 0:17:20.359 do it yourself investor, to do it yourself advisor is 0:17:20.400 --> 0:17:23.840 relatively small. Uh and that's talking my own book. We've 0:17:23.880 --> 0:17:25.720 seen the growth, we continue to see it. Maybe that 0:17:25.760 --> 0:17:30.840 will change, but the the tools are are improving. But 0:17:31.080 --> 0:17:36.600 the advice, the consultative, the defense, the ultimate fiduciary responsibility 0:17:36.600 --> 0:17:39.800 for the performance and any errors or that occurred to 0:17:39.800 --> 0:17:42.400 it need to land on a money manager. So most 0:17:42.440 --> 0:17:45.400 of the fintech firms. We had our head trader leave 0:17:45.440 --> 0:17:48.240 Parametric twenty some years ago and start a firm to 0:17:48.359 --> 0:17:50.960 bring direct indexing technology directly and put it on the 0:17:50.960 --> 0:17:54.320 desk of the advisor. They eventually pivoted away. There are 0:17:54.320 --> 0:17:57.240 a lot of firms out there, but the our size 0:17:57.240 --> 0:17:59.840 and the size of our largest competitors in this space 0:18:00.119 --> 0:18:02.880 are people who actually manage the money. So our job 0:18:02.920 --> 0:18:04.960 and our goal and our vision is to continue to 0:18:05.080 --> 0:18:09.280 build technology that enables the advisor to use our services 0:18:09.480 --> 0:18:19.040 to the best advantage for themselves and the clients. And 0:18:19.080 --> 0:18:21.479 how about some of the turn key asset management players 0:18:21.520 --> 0:18:24.800 that are sort of developing these They already have huge 0:18:25.119 --> 0:18:29.159 advisor networks and this becomes defense for them from you know, 0:18:29.240 --> 0:18:35.159 clients you know considering either being bequested accounts or you know, 0:18:35.200 --> 0:18:37.959 considering self managing. How does that play? We view them 0:18:37.960 --> 0:18:40.520 as clients for us. We we work within many of 0:18:40.560 --> 0:18:43.120 the largest turn key asset management providers. We work within 0:18:43.560 --> 0:18:48.639 every wealth management platform, advice platform. UM. They can choose 0:18:48.680 --> 0:18:52.240 to build the technology themselves, hire someone else by a fintech, 0:18:52.359 --> 0:18:54.560 or they can work with a firm like ours. The 0:18:54.600 --> 0:18:57.400 market continues to expand there will be room for all 0:18:57.440 --> 0:19:01.440 of those business models. UM. You know, we'll see. And 0:19:01.880 --> 0:19:05.320 when I posted about this on Twitter, UM two advisors 0:19:05.400 --> 0:19:08.320 wrote back and just said, if I use direct indexing, 0:19:08.680 --> 0:19:12.280 does the client statement show five hundred stocks? And um, 0:19:12.359 --> 0:19:14.960 I remember looking. I did a every time that there's 0:19:14.960 --> 0:19:18.520 an election for president, I look at the financial disclosures 0:19:18.520 --> 0:19:21.840 of each candidate to find out like how they invest them. Yeah, 0:19:21.880 --> 0:19:23.639 and you look at like when you get them, and 0:19:23.720 --> 0:19:28.240 it's always like seven to thirty mutual funds, maybe some ETFs, 0:19:28.240 --> 0:19:31.880 but Donald Trump was like thirty five pages of stocks. 0:19:31.920 --> 0:19:35.240 And I I imagine something overwhelming coming to a client 0:19:35.320 --> 0:19:37.959 or an advisor, having that fear of handing them just 0:19:38.040 --> 0:19:40.480 pages and pages of equities and them not really understanding 0:19:40.480 --> 0:19:41.640 what they do. Because when you look at a couple 0:19:41.680 --> 0:19:43.840 of funds, you kind of understand where you are. Yeah, 0:19:43.840 --> 0:19:46.520 that partment feels like really old school. Actually, it's like 0:19:46.520 --> 0:19:48.800 a step back. That's what somebody said when we when 0:19:48.840 --> 0:19:52.879 we started in the broker dealer platforms and took our 0:19:52.920 --> 0:19:56.320 family office services and move them into the advice platform. 0:19:56.400 --> 0:19:58.520 Some of the initial advisors used to call it management 0:19:58.520 --> 0:20:01.680 by phone book because is the statements that would show 0:20:01.760 --> 0:20:05.600 up on their clients doorstep worth so thick. Uh. But 0:20:05.880 --> 0:20:08.520 the industry, the value is here. So the inventustry evolved 0:20:08.600 --> 0:20:11.600 one way to keep your job out, Yeah, exactly. The 0:20:11.600 --> 0:20:16.160 the the suppression of movement to our electronic confirms electronic statements, 0:20:16.160 --> 0:20:19.720 and the way that the savvy platforms and advisors compressed 0:20:19.720 --> 0:20:22.240 the parametric line or a competitors line into a single line. 0:20:22.400 --> 0:20:25.720 We've we've solved that for a large part um. We 0:20:25.720 --> 0:20:28.280 don't own all five hundred stocks in the SP's it's 0:20:28.359 --> 0:20:30.359 maybe a difference without a distinction, without a difference, we 0:20:30.400 --> 0:20:33.359 own maybe three twenty five or two hundred and fifty, 0:20:33.359 --> 0:20:35.760 and we'll let people cap it. There are competitors of 0:20:35.800 --> 0:20:39.120 eyes who who build direct indexing with seventy five twenty 0:20:39.160 --> 0:20:42.719